Is it possible to get through an earnings call in 2023 without talking about AI?
Apparently not!
AppLovin spent most of its Q2 earnings call on Wednesday hyping Axon 2.0, the latest version of its AI-based ad tech platform, which the company released last quarter.
Axon uses predictive machine learning to target app-install ads to the users most likely to download those apps. The algorithms were trained on first-party data from AppLovin’s portfolio of games, including trillions of daily in-app events.
CFO Herald Chen attributed what he referred to as AppLovin’s “outperformance” in the second quarter to Axon 2.0.
Total revenue in Q2 was $750 million, beating estimates by more than $25 million. AppLovin was also profitable in Q2. After reporting a net loss of $22 million in Q2 2022, it generated $80 million of net income last quarter.
AppLovin’s stock surged by nearly 25% in after-hours trading.
Soft spot for software
The upgrade from the first version of Axon, which was released in 2021, is part of a broader strategy to deprioritize AppLovin’s content business and grow its software platform business, which includes tools for user acquisition, in-app bidding and analytics.
Software is a much higher-margin business, especially considering the rising cost of user acquisition. AppLovin restructured its app portfolio last year and shut down roughly one-third of its gaming studios.
Revenue from the software side of AppLovin’s house grew 28% YOY in Q2 from roughly $318 million to $406 million, and did so at a better profit margin than its own in-app revenue. (The software platform saw an adjusted EBITDA of 67% versus 18% for apps revenue.)
As software becomes the star, AppLovin expects app revenue, which has been declining quarter-over-quarter since the restructuring, to continue falling. App revenue declined 25% in Q2 to $344 million.
‘A better dollar’
Software revenue will likely soon surpass app revenue and keep growing, thanks to the investment in Axon 2.0.
The upgraded recommendation engine, which will reach its full run rate in Q3, is “dramatically better than the technologies that we were using,” said AppLovin CEO Adam Foroughi.
He added that Axon 2.0’s positive impact on campaign performance has been “immediate.”
Over time, Foroughi said, “that’ll compound and advertisers will be willing to spend more on our platform because they’re seeing better return on ad spend on their buys.”
The better the returns, the more advertisers will spend and the more inventory will enter the system. As spend rises, so will auction density.
As all this is happening, Axon 2.0 will keep on learning and improving.
At least, that’s the idea.
“The technology not only helps fuel our growth, [but] our customers are spending a better dollar on our platform,” Foroughi said. “And that will compound for them, too.”
